Local government bonds: democratizing ESG investment?

In the last few years more than 300 local authorities have declared climate emergencies. In doing so these councils have committed to taking radical measures to achieve net zero targets over the next couple of decades.

The overwhelming support for tackling the climate crisis within local government is encouraging but achieving meaningful progress will take some doing, not least against a backdrop of major cuts to council budgets over the last decade.

The changing mood in town halls coincides with a wider acceptance that governments – both local and national – must pull every lever at their disposal to reduce carbon emissions. A government survey from April 2021 found that 78% of participants either ‘strongly’ or ‘somewhat’ support the UK’s target of reaching net zero by 2050.

But the journey to net zero will no doubt be a bumpy one, with some coming out in opposition to policies which prove inconvenient or costly to them. With this in mind, councils have a vital role to play in implementing net zero strategies successfully.

The dual demands of meeting net zero targets and delivering on local priorities has given rise to an alternative means funding: local government bonds.

The story so far

While municipal bonds have existed for a long time, there have been a number of examples recently, of UK councils effectively crowdfunding cash to fund green investments. This is done through Community Municipal Investments (CMI) arranged by the firm Abundance Investments.

One such bond was launched by Islington Council in October 2021. The north London council is aiming to raise £1m to be spent on projects including electric vehicle charging points, installation of solar panels on public buildings and working towards zero carbon recycling and waste collection.

Islington’s CMI works by allowing locals to invest as little as £5 and offers investors a return of 1.55% per annum over five years. According to Abundance Investments, across all of their CMIs, 15% of investors have chosen to donate their interest back to the council for further projects. This dynamic demonstrates the appetite local investors have for funding change in their areas.

Other councils to have launched these types of bonds include Blaenau Gwent, Cotswold District Council, Eastbourne, Camden, West Berkshire and Lewes. Meanwhile Abundance Investments has suggested that dozens more councils have expressed an interest in launching their own bonds.

As well as these ‘crowdfunded’ bonds, some local authorities have turned to the UK Municipal Bonds Agency (UKMBA) which instead sells bonds on the debt capital markets. The first to do so was Lancashire County Council who went on to issue a second bond a few months later.

Now the UKMBA has turned its attention to the ESG agenda by establishing its own Sustainable Finance Framework, allowing it to issue green, social and sustainable finance. This new framework offers local authorities another route to funding ESG projects such as public transport, schools, care homes, libraries and more.

What next?

Early examples of council bonds have been focused on funding net zero plans. But when considered from an Environmental, Social and Governance (ESG) view point it seems there is potential to apply the same model to improve councils’ performance on ‘social’ metrics.

Of course, addressing the climate crisis is by far the most high profile aspect of the ESG agenda. But as public understanding of ESG and responsible investment grows, who is to say that there will not be opportunities to garner interest in addressing social issues?

What about raising funds for a new youth centre? According to the YMCA youth charity, spending on youth services in England and Wales has been cut by 73% in real terms since 2010. These public services are seen as a key preventative measure in the fight against crime, in particular knife crime. Funding the creation of more youth centres across the country would promote better social cohesion and support for local parents therefore representing an effective ‘Social’ investment.

This is just one example of how a council can target the ‘S’ in ESG. Given councils’ wide remit, the possibilities to fund improvement in sectors such as education, social care and public health are a real possibility.

Placed-based impact investing and levelling up

The council climate bonds that have been launched so far are prime examples of placed-based impact investing: investments that produce financial returns while delivering positive local outcomes.

Naturally, it is local councils that have taken the lead on this but recent developments in Whitehall suggest that central government is also beginning to acknowledge the potential of place-based impact investing.

Unveiling its flagship Levelling Up White Paper last week, the government announced it would look to “work with Local Government Pension Funds to publish plans for increasing local investment, including setting an ambition of up to 5% of assets invested in projects which support local areas”.

Harnessing just 5% of the Local Government Pension Scheme (LGPS) would equate to more than £16bn to be invested in local projects. Interestingly, this is the same figure recommended by The Good Economy, the Impact Investing Institute and Pensions for Purpose in their 2021 report on place-based impact investment.

It seems then that the government is waking up to the benefits of place-based investing by making it a key strand of its levelling up policy, but proponents of the method believe this move is just the start.

Reacting to the white paper, Sarah Forster chief executive of The Good Economy, said: “We believe that place-based impact investing is an investment paradigm whose time has come. It can provide the financial innovation needed to level-up the UK at the scale that is necessary.”

“We believe that place-based impact investing is an investment paradigm whose time has come. It can provide the financial innovation needed to level-up the UK at the scale that is necessary.”

If the UK government is to fulfil its ambition of levelling up the country and reducing place-based inequalities it will take an enormous overhaul of traditional investing methods at both national and local levels.

Channeling vast institutional capital such as the LGPS will provide a huge financial boost to levelling up efforts. But when paired with the nascent local government bond movement there is an opportunity for local authorities to take the initiative and solve the issues that are most important to local people.